How Does Solar Credit Work? (Tips and Tricks for Homeowners)
Solar energy is renewable energy and is seen as an environmentally friendly option. As a result, many government entities around the world offer some benefits to encourage individuals to install solar energy systems at home. One way is to give solar credits.
It can be a little confusing to figure out how solar credits work, especially when there are many ways to apply, secure, and benefit. How does solar credit work?
In the US, the federal government offers the Residential Clean Energy Credit. In this plan, you can use up to 30% of the cost to install solar energy systems for your home and claim rebates from your federal income taxes. Other credits are also available and, in many cases, stackable.
This article explores tax credits as a whole and what sort of tax credits are available in the US. We then look into how solar tax credits can help you save money and stack other solar credits together with your federal tax credit.
What Is Solar Credit?
Solar credit can be described as an individual getting some financial benefit or credits from using or installing a solar energy system. Solar credits could be given in many ways, such as rebates, tax credits, matching grants, etc. Different governments may offer different types of solar credits.
Solar credits could be seen as some financial benefit you stand to get from your solar energy use. The financial benefits may come in many forms, such as rebates, tax credits, matching grants, etc.
The government usually gives these solar credits to encourage the adoption of solar energy in homes worldwide. Government authorities in different countries may create different solar credit systems for their citizens.
One of the most common ways to give solar credits is by offering solar tax credits. In this system, individuals that installed a solar energy system may be eligible to claim some reductions from their income tax.
How Does Solar Credit Work In The US?
The most popular solar credit in the US is the Residential Clean Energy Credit (RCEC). It allows you to claim up to 30% of your spending on installing solar energy systems against your income tax. However, not all solar energy installations are eligible, so you want to check the finer details first.
The federal government currently offers the Residential Clean Energy Credit (RCEC) in the US. It is part of the Inflation Reduction Act, signed into effect in 2022.
In the Residential Clean Energy Credit, if you are to install eligible solar energy systems, you can get income tax reductions. The reductions can be up to 30% of the amount you spend installing it.
For example, suppose you owe $12,000 in federal income tax. However, since you spend $30,000 to install solar energy systems at home, you can claim up to $9,000 in tax breaks. This means you only pay $3,000 in income taxes instead of the full amount.
However, not all solar energy systems are eligible for tax credits. At the time of writing, eligible solar energy systems need to:
- Be installed between January 1, 2017, to December 31, 2034.
- Be installed and located at your property in the United States.
- Be installed and completed under the tax year. If not, you can claim the tax credit in the next tax year.
- Be under your ownership. Ownership includes:
- You purchased the solar energy system outright.
- You financed the solar energy system using loans but are not generating revenue from the system, such as leasing the panels out or selling the energy to energy companies.
If you purchased an interest in an off-site community solar project, you could also claim for the RCEC. However, you must ensure that the electricity generated is credited against you, and does not exceed your home’s electricity consumption.
What Kind Of Spending Are Eligible For The Solar Tax Credits?
The Residential Clean Energy Credit (RCEC) allows the money you spend on purchasing solar energy systems to be claimed for tax credits. It also includes contractor, inspection, developer fees, purchase of at least 3 kilowatts batteries, and eligible sales taxes.
Take some time to read up on the Residential Clean Energy Credit (RCEC) explanations from the Department of Energy’s website. You may be able to claim many of your expenses on solar energy system installations.
These include:
Solar Photovoltaic (PV) Panels Or Cells: There does not seem to be any explanations about types of PV panels, which means all should be eligible to claim for RCEC, be it Poly or Monocrystalline.
All Equipment Needed To Run The Solar Energy System: These should include inverters, wiring, and mounting equipment. Again, there was no mention of inverters or mounting eligible for the RECE, which means all types of may quality.
Storage Batteries: Not all storage batteries are eligible for RCEC, a change from the previous policy. The current policy requires that your battery be able to store at least 3 kilowatts to qualify for the tax credit.
Contractor Labor: Aside from the materials and equipment, you can also claim a tax credit on the fees paid to contractors who installed your solar panels. The labor fees cover work such as onsite preparation, assembly, or original installation.
Related Fees: You may need to pay some fees to inspect your solar energy system. You may also need to pay for a permit from your residents’ association or local government. Most of these fees are claimable for tax breaks under the RCEC.
Eligible Sales Taxes: You may be charged some sales tax when paying for any of the above. These taxes are also claimable for tax breaks under the RCEC.
How Will The Solar Tax Credit Help You Save Money?
Solar tax credit helps you to save money by lowering your income tax payment. You get to deduct at least 30% of your spending on solar energy panels from your income tax. You also save on electricity bills since you will use the solar energy generated.
As a start, it is important to understand why the RCEC is in effect today. The US federal government wants to encourage you to adopt and transition to solar energy since it is renewable and environmentally friendly.
As such, the RCEC is enacted and helps to save money in many ways when installing solar energy systems.
Lowering Your Income Tax
Since the RCEC allows you to claim up to 30% of your total solar energy system bill for the tax break, you get to pay less income tax.
For example, suppose you owe $12,000 in federal income tax. However, since you spend $30,000 to install solar energy systems at home, you can claim up to $9,000 in tax breaks. This means you only pay $3,000 in income taxes instead of the full amount.
With the RCEC, you do not just save over $9,000 in tax money. Still, you also get a well-running solar energy system that will generate energy and help you save more money.
Save On Electricity Bills
To benefit from the RCEC, you must install your own solar energy systems. On top of that, you also must be using the energy generated from solar cells, meaning you cannot sell the energy generated to others.
This means you will be saving on your energy bills since you use less. This may be great news for you, as the savings from electricity bills may be useful in many ways.
For example, you can use the funds to help you pay down your solar energy installations faster if you installed yours on credit.
YOU MAY BE INTERESTED IN: How To Install Solar Panels On Credit
Save Fuel
Finally, you can save on fuel. This is because you can use the electricity generated from your PV panels to charge your vehicle. This is provided, of course, if you have an electric vehicle (EV) or plan to get one soon.
If you own an EV, you also save time and money. You no longer need to drive to a charging station to charge your vehicle or pay any fees to use the charging services. Just park the car in your driveway, plug in the charger, and watch your battery rise.
Can You Stack Other Benefits After Getting Federal Tax Credits?
You are able to stack your benefits, as the federal tax credits do not get reduced even if you take up any state-level credits. Some states may reduce your state tax deductions if you take up the federal tax break. With the Federal Solar Tax Credit, you may stack other benefits, such as Energy Efficient Home Improvement Credit.
One thing unique about the US is the level of government available to us. Federal, state, and local (county/municipality) governments exist. These governing entities may offer additional tax credits to support solar installations in their jurisdictions.
This means you may be eligible to apply for several solar credits after you have put in your solar energy systems. The question now is, can you actually claim and benefit from several of these tax credits?
The answer is you may be able to, depending on the tax credits you are applying for. In general, if you are to apply and are given a state tax credit, your tax credit with the federal government is not affected.
However, some state governments may reduce the number of tax breaks you get if they discover that you have taken up the RCEC with the federal government.
If you are wondering if you can stack and benefit from more than one solar credit program from the federal government, you may also be able to do so.
You may be able to stack the following federal programs with your RCEC:
Nonbusiness Energy Property Credit: With this program, you can claim tax credits for installing Energy Star-certified windows, doors, insulation, and heat pumps.
Energy Efficient Home Improvement Credit: You can also claim for this program, which allows up to 30% of the cost or up to $1,200 a year of tax credits. For heat pumps, you can claim up to $2,000.
It may be a good idea to discover the programs and credits available for your state and local area. Then, you can investigate the programs you are interested in and see if you can stack them together for maximum savings.
How Do You Claim For The Solar Tax Break?
You can claim Federal Solar Tax Credit by filling and attaching the IRS Form 5695 on your federal tax return. You can also seek help from an accountant to help you perform the claim on your behalf. It may be wise to first seek an accountant before filing the claim.
In general, filing and applying for the solar tax break is straightforward. Start by collecting all the receipts from your solar installations, and take them to a tax accountant. Ask for the accountant to see if you are eligible for the RCEC.
If the accountant confirms that you can file for one, you can now decide between having the accountant file on your behalf, or you do it yourself.
Many may prefer an accountant to help, as it simplifies the work. An accountant can also help you file for tax credits from your state or local government.
However, should you decide to do it yourself, ensure to attach the IRS form 5695 to your federal tax return (Form 1040 or 1040NR). Check with your state and local government to see if there are forms to claim for state or local government tax breaks.
Final Thoughts
Understanding tax credits can be a valuable tool for saving money when going solar. With solar tax credits, individuals and businesses can benefit from significant reductions in the cost of solar installation.
By stacking these credits with other solar incentives and federal tax credits, it’s possible to save even more money.
While the process of applying for and receiving tax credits can seem daunting, the long-term financial benefits make it a worthwhile investment.
Taking advantage of these tax credits can not only help you save money but also contribute to a sustainable future by reducing your carbon footprint.
Are you interested to know if there are scenarios where solar panels can be considered illegal? We have done the research.
